What is a secured loan?
Secured loans can be a way to borrow more money, by using your home (or another valuable asset) as security.
Key takeaways
Secured loans require collateral (e.g., your home) to borrow larger sums or money
A secured loan comes with the risk of losing your home if you cannot repay the loan
Interest rates are often cheaper with secured loans
There might be early repayment charges
Secured loans are popular for those looking to borrow larger sums, often for significant investments like home improvements. But what exactly are secured loans, and how do they differ from their unsecured counterparts?
What are secured loans?
Secured loans are financial products that allow you to borrow substantial amounts of money by offering a valuable asset as collateral, typically your home. This security reduces the risk for the lender, which often results in the borrower securing a bigger loan amount at a lower interest rate.
However, they come with risk and if you fail to keep up with the repayments, you risk losing your property.
What is the difference between secured and unsecured loans?
Secured and unsecured loans have some key differences:
Secured loans | Unsecured loans | |
|---|---|---|
Borrowing limits | Borrowers can usually access larger sums of money | Smaller amounts available |
Interest rate | Lower interest rates than unsecured loans | Often higher than secured loans |
Loan requirements | A form of collateral, such as your home | Based on your credit score |
Level of risk | You could lose your home if you don’t make the repayments | You may be charged extra and your credit score can be impacted if you don’t repay on time |
If you're finding it challenging to choose between the two, our guide on unsecured vs. secured loans can help.
Types of secured loans
There are several different types of secured loans to choose from:
Variable rate
These loans have interest rates that fluctuate with the market, which means your repayments could go up or down.
Fixed term
With fixed monthly repayments for the entire term, these loans make budgeting more predictable.
Short-term fixed rate
These offer fixed repayments for an initial period, after which the rate reverts to the lender's standard variable rate.
Do you have to pay back a secured loan?
Yes, you have to repay the loan, plus any interest that is applied to it. If you don’t make the repayments, you could face extra charges, a higher interest rate or in the worst case you could have your home repossessed (or whatever item you have secured the loan against).
What are the pros and cons of secured loans?
Secured loans have their advantages and disadvantages:
Pros:
Borrowing power: You can access larger sums at lower rates.
Credit building: Timely repayments can improve your credit score.
Extended repayment periods: You often have more time to repay the loan, though this can lead to more interest paid over time.
Cons:
The risk of losing your home: If you default on repayments, your property is at risk.
Early repayment fees: Some lenders may charge you for paying off the loan early
Higher overall interest: Longer loan terms can mean paying more interest over the life of the loan.
Can you get a secured loans with bad credit?
If you have a poor credit score, you may still be able to take out a secured loan. A lender will look at your credit score along with things like your income, outgoings, and the value of the asset you are securing. You may be offered a lower limit, or a more expensive interest rate, than someone with a good credit score.
Can you make early repayments?
Thinking of paying off your secured loan early? Be sure to check if any early repayment charges apply. Lenders may impose these fees to recoup the interest they'll miss out on if you settle the loan sooner than agreed.
What are the alternatives to a secured loan?
Secured loans aren't the only route to borrowing. Alternatives include:
Unsecured loans: Also known as personal loans, these don't require collateral and can still help build your credit score.
Credit cards: A credit card may be suitable for short-term borrowing of smaller amounts.
Guarantor loans: With a guarantor loan, someone else agrees to cover the debt if you can't.
For more detailed information, consider reading our guide to logbook loans, a guide to loan repayments, and how to get a loan with poor credit.
Personal Finance & Insurance Expert
Our expert says...
Secured loans can be a financial lifeline if you need to borrow a large sum of money. There are lots to choose from, so always compare providers, loans and costs. They give access to bigger amounts, usually at a lower interest rate. However, you need to be comfortable with the level of risk attached to them. If you don’t make your repayments – you could lose your home.
Compare with MoneySuperMarket
MoneySuperMarket simplifies the process of comparing secured and personal loans. Our service offers a tailored list of options that won't affect your credit rating and is free for customers. Remember, to secure a loan, homeownership is a must.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.
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Rebecca Goodman
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Rebecca is an award-winning financial journalist with over a decade of experience writing for print and online media. Her mission is to take the jargon out of personal finance and to help everyone...
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